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November 18, 2019 | Fear of Heights

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

As 2019 began Bay Street legend David Rosenberg told clients falling show ticket prices on Broadway were reminiscent of 2007, and they should get set for “the high (and rising) risk of a recession.” Like, move to cash.

Since then the Toronto stock market – despite an utter collapse in weed outfits – is up 19%. The US market (despite the trade war and you-know-who) is ahead 24%. Boring balanced & diversified portfolios are clocking in around 12%. Bond prices are down, yields are up, the inverted curve thingy is history, corporate profits are A-ok and there’s no recession. Not even close.

But fear sells. The people who pump gold and crypto depend on it. TNL@TB with her bevy of GICs and HISAs thrives on scardey-cat investors. Same with the insurance floggers and their segregated funds – sucking off massive fees so investors can have a guarantee of getting their money back in a decade. (There hasn’t been a decade yet when it was required.)

Now, some people say today is different and it’s completely understandable to be frightened poopless. Trump is unpredictable. Hong Kong’s a powderkeg. Syria-Turkey-Kurds-Iran, whew. What if Brexit happens? Or Wexit? Or Putin’s nuke cruise missiles blow up again? Or China starts its world domination?

Others worry about debt. We’re pickled in it. Nobody has any cash. Interest rates are a joke. How can this last? And what about governments? After all, Washington alone accounts for a third of the entire world’s government debt and there are zero plans for reining it in. If the States goes down, we’re but a dustbunny in the global Hoovering. Look at this chart form the scary bear dude at Wolf Street. Yikes.


So are stock markets which have hit new highs and handed double-digit returns to investors now financial IEDs? Do they need to blow because they’ve inflated so much? Is the prudent thing to take money off the table – or is this another Rosenberg moment when doing so results in a serious loss of wealth?

I asked my suspender-snapping, Porsche-driving, trophy-wife, prodigy-children, omniscient portfolio manager buddies Doug and Ryan for a few words on this topic, which will be followed by the only investment advice you will ever need.

The first point Doug makes is that highs are meaningless since 77% of the time markets go up (like the economy). How can you beat those odds? For example in 2017 the Dow hit a new high 70 times. If you’d sold in fear when it touched 20,000 (as Rosie suggested), you’d have given up 40% since it now sits at 28,000. Besides, markets get momentum. This one continues to push ahead.

“Now, you can argue, as many bears do, that it’s different this time. For example, valuations have become richer. (My rebuttal would be that valuations almost always exceed long-term averages in bull markets.) However, whether it’s truly different this time or not, is not the point. It’s a mistake to isolate one arbitrary fact as proof of a future outcome: “Markets have done well, time to sell.” This is not a defensible argument.”

As you know, Ryan goes on BNN so I’m not sure about him anymore. But I do agree with his key point – bull markets don’t die of old age. Instead they’re always murdered – by central banks (rates rise) or some external shock (like a housing crash)

“Keep it simple. Last year markets were weighed down by Trump’s trade war and Federal Reserve interest rate tightening. This year markets are rallying on Fed cuts and the growing prospect of a trade deal between the two largest economies in the world. If they finalize a deal (Phase 1) this will remove a major risk to the global economy and equity markets. Then we’re left with a US/global economy, while slowing, is still growing at a decent clip, and very well could accelerate in 2020 if the trade war subsides. This could then lead to higher earnings growth in 2020, which could be the driver for further gains in 2020. With an accommodative Fed, an economy that is neither too hot nor too cold, the prospect for stronger earnings in 2020, and confirming bullish technical trends, as evidenced by the new highs, we remain bullish and see further gains. But we temper out bullish outlook by currently investing in lower risk equities such as low volatility stocks, REITs and blue chip dividends stocks just in case one of the risks (Trump’s trade war, Brexit, Hong Kong etc.) were to materialize and derail this ongoing economic expansion.”

Yes, debt and turmoil surround us. But investors continue to make bank, based largely on the prospects of the US economy, supportive CBs, easing trade tensions, money-making corps and an ocean of cash that is departing the safety of bonds and cash and flowing back into equities. Yes, corrections are inevitable along with economic slowdowns. But they’ve always been temporary and relatively short. Even during the 2008-10 meltdown, investors who stayed invested and ignored the storm with balanced portfolios did just fine – averaging +5% a year, while those who bailed lost a bundle. Fear is an emotion, not a strategy.  It comes with a price. Don’t pay it.

And here’s all you really need to know: Invest when you have the money and stay invested until you need it. All in between is but noise.

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November 18th, 2019

Posted In: The Greater Fool

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